Chapter 11: Financial markets at risk
Aims of the exercise
- To gain an overview the functions of the World Federation of Exchanges
- To better understand how stock exchanges operate
- To grasp the main points of a research paper on volatility in share prices, and consider these in the context of current market volatility
Getting started
Go to the website of the World Federation of Exchanges at
www.world-exchanges.org.
Begin by finding out its functions under ‘About WFE’. Then click on ‘Reports’. Under Reports, click on ‘Focus’, which is the organization’s monthly review. Under Focus Special Editions, click on ‘Market Structure and statistics: getting the whole picture?’ Here there is a pdf to download. Download this report.
This pdf is the Focus edition of November 2008. The first item, on page 4, is the WFE workshop on market structure and statistics, which begins with an article by Professor Robert A. Schwarz, entitled ‘Markets at risk’. It is mainly about the US exchanges. This is an academic paper, which contains a number of technical terms from the world of finance. Although some of the terminology might look daunting, the author writes clearly and defines key terms. His aim is to explore volatility in share prices on stock exchanges. This is a highly relevant topic in today’s turbulent markets.
Tasks
A. Questions
Read this article and answer the following questions:
- What does the analogy with the ant tell us about financial markets?
- Schwarz refers the contrast of ‘Wall Street v. Main Street’. This is a phrase which is often used in media reports, comparing the New York financial district (Wall Street) with the ‘real’ economy. What is the relationship between the two, in the author’s view?
- What are the areas of risk and uncertainty that the author highlights?
- The author stresses that he believes in the efficiency of markets, but also the need for stability. He cites two areas, regulatory intervention and market structure, in which reforms can bring greater stability. Why are these two factors critical in today’s markets?
B. Reflection
- The volatility of share prices is a risk for listed companies, some of which have seen steep falls in their share prices, simply because of market volatility and not because of any weakness in the company or its governance. This could well lead companies to rethink their capital structures, or even attempt to de-list and go private. If you were a chief finance officer of a large company, what would you advise the CEO in these circumstances?
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